An actual rise in interest rates remains a long way off for the ECB, analysts predict

Frankfurt am Main (AFP) - The European Central Bank said Thursday it would withdraw some of its crisis-fighting stimulus, even as trade tensions, emerging market woes and Italy bucking budget rules shade the economic outlook.

From October, the Frankfurt institution will halve its “quantitative easing” (QE) purchases of government and corporate bonds to 15 billion euros ($17.4 billion) a month, a spokeswoman said.

The asset-buying will continue at that rate until the end of December, when the bank “anticipates” the stimulus programme will end, “subject to incoming data confirming the medium-term inflation outlook”.

ECB governors also left interest rates untouched at historic lows, sticking to their guidance that they would remain unchanged “at least through the summer of 2019”.

At recent press conferences, ECB chief Mario Draghi had proclaimed “confidence” in the outlook for growth and inflation, saying risks “broadly balanced” between positive and negative are not enough to knock off course the bank’s pursuit of stable price growth close to but below 2.0 percent.

That has meant the central bank can press on with its withdrawal from QE – launched in March 2015 to pump cash through the financial system and into the real economy, powering growth and inflation.

For now, “the fundamental backdrop clearly speaks for the ECB exiting its ultra-loose monetary policies,” UBS analysts commented, pointing to relatively steady growth in the eurozone and rising wages likely to stoke prices towards the target.

Nevertheless, “the balance of risks has become more unfavourable in recent months,” the bankers added – something journalists will grill Draghi on at his 2:30 pm (1230 GMT) press conference.

- Growing risks -

The ECB chief in the summer highlighted the danger of trade friction between the United States and China and the European Union.

With President Donald Trump now threatening to hit all imports of Chinese goods into America with tariffs, fears of a global economic slowdown triggered by protectionism have only grown.

Elsewhere, currency crises that have flared in major emerging economies Turkey and Argentina now risk undermining eurozone export partners like Germany and Spain.

And within the euro area, governments and financial markets fear Italian ministers will honour pricey electoral promises rather than shrinking Rome’s tottering debt pile of 132 percent of annual gross domestic product – more than twice the EU target.

Despite official reassurances, the so-called “yield spread” – which measures the difference in perceived risk between Italian and ultra-safe German government bonds – remains uncomfortably high.

Neither is macroeconomic data all rosy.

While headline inflation reached 2.0 percent last month, “core” inflation – which rules out volatile items like food and energy prices – notched up just 1.0 percent.

And unemployment across the euro area remains stubbornly high compared with other advanced economies, at 8.2 percent – limiting upward pressure on salaries and, indirectly, prices.

- ‘Patient, persistent, prudent’ -

“With growth still ‘good’ for now, and given signs that core inflation should rise, (Draghi) is unlikely to suggest that the Council is about to reconsider its strategy,” Capital Economics analyst Jennifer McKeown predicted.

But he will “stress the Bank’s flexibility and indicate that it is not wedded to ending asset purchases this year or to raising interest rates after next summer,” she added.

“The risks of a later hike, or indeed no hike at all, have risen.”

Financial players will also be looking out for hints about how the central bank will reinvest the proceeds as the 2.5-trillion-euro stock of corporate and government bonds it has amassed since 2015 matures.

Policymakers plan to buy new bonds with the payouts, hoping to influence markets and keep debt cheap long after ending their asset purchases.

The ECB’s press conference will also bring new growth and inflation forecasts from the central bank staff looking as far ahead as 2020, but no major changes are expected – leaving the floor open for a re-run of Draghi’s “patient, persistent, prudent” greatest hits.